Words: George Hedley
It always amazes me how many construction company business owners don’t have a good handle on their numbers. Through hard work, diligence and a great reputation for getting jobs done on time with quality workmanship, their companies grow from $0 to $1,000,000 to $5,000,000 or even $10,000,000 or more in annual sales. All this work without really knowing:
- Annual sales needed to make a profit
- Annual mark-up needed to make a profit
- Annual overhead cost
- Actual net or gross profit margin made on jobs completed
- Bid mark-up versus actual completed job mark-up made
- Actual field production labor cost per unit of work
- Cash in bank, accounts payable and receivables
Profit Is The Number 1 Reason For Owning A Business!
When coaching construction company owners, I often ask: “If I hired you as the president of my construction company, what are the most important things you need to be accountable and responsible for?” The right answer is to always make a profit! If you don’t know and track the numbers, how can you properly manage your business, make the right decisions, do what’s required to hit financial and growth goals, and stay on track to make a good profit? Without profit, working hard, doing excellent work, and completing projects on time doesn’t really matter.
Many construction business owners also don’t really know how much money they make or what it takes to break even and hit their annual goals. This tells me these owners don’t focus on what counts and why they’re in business. You can’t rely on someone else, your spouse, a bookkeeper, or your CPA, to care about your finances more than you do. You’re in business to make a profit, not to work hard for little or no reward. Often hardworking, dedicated, multi-tasking owners don’t like to be bothered with or deal with the numbers. So, they pass financial matters off to an untrained unqualified bookkeeper or caring spouse to handle and manage their money, worry about making payroll and paying bills, and getting paid. To make matters worse, many bookkeepers don’t understand construction accounting and have never been trained, taken a class, or read a book on the basic requirements of contractor accounting and financial management.
You can have someone else pay your bills, send out invoices, prepare financial reports, and do accounting, but the owner MUST be responsible to know, review, understand, and track the numbers daily, weekly and monthly. Not just once a year when you meet with your accountant to find out that you didn’t make what you had hoped to. Guess what? Construction business owners who know their numbers make the most money!
Deadly Drywall’s Numbers
Billy owns Deadly Drywall, a commercial drywall and metal stud contractor. He wants to grow his business and asked me for some financial advice. His annual overhead expenses are $500,000, including his salary, estimating, administration, and office costs. Like most of his competitors, the average overhead and profit mark-up he can get from customers on most $100,000 to $200,000 subcontracts is around 20% (16.67% Gross Margin). His goal is to make an annual net profit of $250,000. How much sales volume will he need to reach his goal?
Using the BIZ-Builder Formula To Always Make a Profit, Deadly Drywall’s annual overhead and profit goal is $750,000, and their average mark-up is 20% (16.67% gross profit margin). The annual sales volume needed formula is OH+P / GP% = $750,000 / 16.67% = $4,500,000 sales. Simple to figure if you know your numbers! Now Billy knows annual sales needed to hit his gross and net profit goals. Next, he can track monthly sales volume revenue required and achieved to stay on target to hit annual sales, overhead, and profit goals.
Numbers Contractors Need To Know & Track!
Just like in sports, every business owner needs a scoreboard tracking results to keep informed and on-target towards achieving their annual goals. What financial scorecard benchmarks do you need to know and track to be successful and stay on track towards hitting your financial goals? Here are the important numbers every contractor must have on their Financial Scoreboard:
FINANCIAL SCOREBOARD
Income Statement (Profit and Loss) – Monthly
The income statement is your scorecard showing how well your company does every month. It shows the earned income, construction job costs, gross profit, overhead, and net profit. This report must be reviewed in detail no later than 15 days after month end.
- Sales Revenue Billed (Including Retention)
- Direct Job Cost Expenses
- Gross OH + P Margin
- Gross Margin %
- Mark-Up %
- Company Overhead
- Net Profit
Work In Progress (WIP Schedule) – Monthly
Top construction business owners know their contract and estimated final cost numbers for every project they have under construction or completed. They also know and track gross and net profit projected or earned for every job, how well they did over the past year, and how well they’re currently performing on every project. To know and manage your numbers, you need to prepare and review monthly updated Work In Progress and Completed Contract Schedules listing all of your completed and current projects under construction and completed. Be sure to track bid mark-up versus final mark-up achieved to see if you are actually making what you estimated or bid projects at. Also note which project managers, superintendents, and foremen make you money and which tend to have profit margins fade or shrinkage.
The WIP Schedule is a detailed list of all of your projects, clearly showing how well they are doing compared to the original budget. The WIP also shows your estimated final cost of each project, over-billed and under-billed amounts, contract backlog, and gross profit backlog.
Job Cost Reports (Consolidate Cost Report CCR) – Monthly
Every month, for every project, complete a Project Job Cost Report to determine how well you’re doing versus your budget. The monthly report should include the current updated project budget versus committed costs, estimated costs to complete, and then the estimated final cost for every line item, trade and budget item. At month end, the project manager estimates how much additional money for labor, materials and equipment will be required to complete the work.
Completed Contracts Schedule – Monthly
Shows the final results for all of your completed projects for the year. Included is original contract amount, final contract, final profit made for each job versus the original bid amount, and mark-up bid versus actual earned.
Financial Statement (Balance Sheet) – Monthly
Your financial statement is your scorecard showing your company assets, liabilities, and net equity or net worth of your business. The goal is to increase your assets, which will enable you to grow bonding capacity and business valuation.
- Current Assets
- Long Term Assets
- Total Assets
- Current Liabilities
- Long Term Liabilities
- Line Of Credit
- Equipment Loans
- Real Estate Loans
- Credit Card Balances
- Taxes Due
- Other Loans / Debts
- Stockholder Capital / Equity
- Return On Equity
- Working Capital (Current Assets – Current Liabilities)
Accounts Receivable Aging Report – Weekly
How much are you currently owed? What about retention outstanding and payment dates? Your accounts receivable numbers are the lifeblood of your company. No cash flow = no business! Building projects is fun and rewarding, but putting money in the bank is even more fun! I know it’s not your favorite thing to call deadbeat customers to bug them for money. But if someone in your company isn’t accountable or responsible for keeping track of who owes money and then collecting it, you can’t continue to stay in business for long.
Stop letting customers take advantage of your easy-going nature and control your cash flow. You did the work, and your contracts say they’ll pay you within a specific amount of time. Keep a list for each project what timeframe is allowed to submit your invoice, and how long customers have to pay. Read your contracts and follow the detailed chain of events required to get paid: invoice, releases, retention amount, date payment due, follow-up requirements, documentation required to demand payment when not paid, and lien or legal tactics.
- Current Receivables
- Receivables over 30 days
- Retention
- Accounts Receivable Total
Cash Report – Weekly
Cash is the lifeblood of your business. You need to know what cash you’ve got to work with in order to make good decisions. Get a report of your cash position every week. Once you know your cash balance, you can manage it aggressively.
Cash In Bank
- Line Of Credit Drawn
- Weekly Payroll – OH
- Weekly Payroll – Field
- Employee Head Count
- Field Crew
- Foreman & Superintendents
- PM & Estimators
- Office, Officers, Admin
- Total Employees
Field Production Job Cost Tracking Scorecard – All Jobs – Weekly
Field labor and equipment are the biggest factors affecting your final job profits. Therefore, tracking field production labor and equipment weekly must be a top priority for every contractor to implement. Foremen who don’t know where their crews stand also don’t know if they are on budget to meet their field production goals. Install field production tracking systems to keep your jobs on track. To track labor hours, productivity, and equipment on projects, implement a weekly job cost production update tracking scorecard for your project managers, supervisors and foreman to use, review, and monitor.
Every week, create an overall scorecard for all of your jobs under construction to see which projects are on budget and which aren’t. Review the results with all your foremen and superintendents and discuss how they’re doing and what improvements they can make. If you don’t know or track your direct job cost numbers weekly, it’s next to impossible to make any money!
Sales Award Tracking Report – Monthly
Less than 20% of all construction business owners know or track their annual sales volume awarded versus their goals. Do you know your sales goals needed at the gross margin you can achieve to cover your annual overhead and make a net profit? How often do you track your sales numbers, and what do you do every month to keep them on target and make sure you sign enough contracts to hit your goals?
- Sales Contracts Award Goal
- Cumulative Sales Contracts Awards
- Gross Profit Award Goal
- Cumulative Gross Profit Awards
Know Your Finances Are In Order!
To receive a spreadsheet of the Financial Scorecard and templates outlined in this article, email GH@HardhatPresentations.com. Trying to build a construction business without organized and systemized financial management tools is like building a house with an empty toolbox and no plans. You can’t do it. Make it a top priority to install the best possible financial systems, technology, reporting methods, and tracking systems. This will allow you to make good business decisions, keep people accountable for results, keep your eyes on the bottom line, and give you time to focus on what makes the most money. An updated timely financial scoreboard plus sound financial management allows you to know the score and make sure you win every game.
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ABOUT THE AUTHOR
George Hedley CPBC is a certified professional construction business coach and popular speaker. He helps contractors build better businesses, grow, increase profits, develop management teams, improve field production, and get their companies to work. He is the best-selling author of “Get Your Construction Business To Always Make A Profit!” available on Amazon.com. To get his free e-newsletter, start a personalized BIZCOACH program, attend a Profit-Builder Boot Camp, or get a discount at www.HardhatBIZSCHOOL.com online university for contractors, Visit www.HardhatBizcoach.com or E-mail GH@HardhatBizcoach.com.
George Hedley CSP CPBC
HARDHAT BIZCOACH
Email: GH@HardhatBizcoach.com
Website: www.hardhatbizcoach.com